Transition economies set to lose momentum as recession looms

The UN Conference on Trade and Development (Unctad) released its World Investment Report for 2020 on 16 June. The report focuses on global foreign direct investment (FDI) trends and compares projected figures with previous performance data.

One of the key findings from the report was the significant drop in FDI flows for economies in transition. The term ‘transition economies’ refers to countries that are changing from a centrally planned economy to a market economy.

Examples of transition economies include Russia, Kazakhstan, Ukraine, Uzbekistan and Serbia. These countries made up the top five host transition economies for FDI inflows in 2019 and collectively saw a total investment of $54.9bn. Russia held the lion’s share of this, accounting for $31.7bn of the total figure.

Now, with a recession looming because of Covid-19, transition economies’ inflows globally are set to fall by approximately 38% during 2020, and growth is not expected to return until 2022.

Alongside this, outbound investment from transition economies had already seen a decline before the pandemic, down from $3.8bn in 2018 to $1.8bn in 2019. As a recession and the commodity price drop will affect the ability of multinational enterprises (MNEs) in transition economies to invest overseas, outbound investment is expected to mirror the inbound investment trend and continue to decrease throughout 2020 and 2021.

Russia’s rough ride

In correlation to the inward investment statistics, Russia also accounted for the majority of transition economies’ outward investment at 95%. This is particularly significant as numerous Russian MNEs have seen a drop in their projected earnings. In fact, 36 of the largest Russian MNEs are expected to suffer a 41% decrease in 2020, according to the report.

Furthermore, Russia is the largest transition economy and its gross domestic product growth had already been relatively low in 2019 at 2%. It is now expected to decline during 2020, despite government measures put in place in a bid to counteract the effects of Covid-19. This highlights how any recession will affect inbound and outbound FDI from transition economies directly, as it will put pressure on Russian investors to adjust their planned investments downwards.

Despite this, and as investment strategies fall under review across the globe, Russian MNEs are still expected to continue searching for new opportunities on the African continent.

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This strategy can in part be attributed to a public initiative adopted at the first Russia-Africa Summit and Economic Forum in 2019. The forum saw numerous FDI deals signed on the day, including the Russian EFKO group’s agreement of intent (in partnership with Egypt’s United Oil) to create a production facility worth approximately $300m.

However, with events such as these now constrained by lockdown measures, a cloud looms over economies looking to both promote investment to their regions and invest abroad; how can they create initiatives such as the Russian/African alliance while business travel and gatherings – which are often crucial to FDI – remain restricted?